UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, ~~2022~~2023

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM __________ TO __________

Commission File Number: 001-38067

Verona Pharma plc

(Exact name of Registrant as specified in its Charter)


United Kingdom									98-1489389
(State or other jurisdiction of incorporation or organization)									(I.R.S. Employer Identification No.)

3 More London Riverside London SE1 2RE United Kingdom									Not Applicable
(Address of principal executive offices)									(Zip Code)

Registrant’s telephone number, including area code: +44 203 283 4200

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Ordinary shares, nominal value £0.05 per share*	VRNA	The Nasdaq Stock Market LLC (Nasdaq Global Market)

* The ordinary shares are represented by American Depositary Shares (each representing 8 ordinary shares), which are exempt from the operation of Section 12(a) of the Securities Exchange Act of 1934, as amended, pursuant to Rule 12a-8 thereunder.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☐

Accelerated filer

☐

Non-accelerated filer

☒

Smaller reporting company

☒

Emerging growth company

☒☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of ~~April 29, 2022,~~May 2, 2023, the registrant had ~~482,944,390~~635,667,302 ordinary shares, nominal value £0.05 per share, outstanding, which if all held in ADS form, would be represented by ~~60,368,049~~79,458,413 American Depositary Shares, each representing eight (8) ordinary shares.


		Page
PART I - FINANCIAL INFORMATION
Item 1	Financial Statements	2
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1512
Item 3	Quantitative and Qualitative Disclosures About Market Risk	2622
Item 4	Controls and Procedures	2622
PART II - OTHER INFORMATION
Item 1	Legal Proceedings	2723
Item 1A.	Risk Factors	2723
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	2724
Item 3	Defaults Upon Senior Securities	2724
Item 4	Mine Safety Disclosure	2724
Item 5	Other Information	2724
Item 6	Exhibits	2825
Signatures		2926

PART I - FINANCIAL INFORMATION

Item 1. Financial statements

Verona Pharma plc

Condensed Consolidated Balance Sheets

(unaudited)

(in thousands, except share and per share ~~amounts and par value of shares)~~amounts)


		March 31,		December 31,			March 31,		December 31,
		2022		2021			2023		2022
ASSETS	ASSETS					ASSETS
Current assets:	Current assets:					Current assets:
Cash and cash equivalents	Cash and cash equivalents	$	132,764	$	148,380	Cash and cash equivalents	$	291,415	$	227,827

Prepaid expenses	Prepaid expenses	1,246		4,037		Prepaid expenses	1,561		2,499
Tax and tax incentive receivable		16,420		15,583
Tax incentive receivable						Tax incentive receivable	11,842		9,282

Other current assets	Other current assets	2,525		2,063		Other current assets	2,073		3,388
Total current assets	Total current assets	152,955		170,063		Total current assets	306,891		242,996

Non-current assets:	Non-current assets:					Non-current assets:
Furniture and equipment, net	Furniture and equipment, net	71		80		Furniture and equipment, net	12		73
Goodwill	Goodwill	545		545		Goodwill	545		545
Equity interest	Equity interest	15,000		15,000		Equity interest	15,000		15,000
Right-of-use assets	Right-of-use assets	744		899		Right-of-use assets	698		854
Total non-current assets	Total non-current assets	16,360		16,524		Total non-current assets	16,255		16,472
Total assets	Total assets	$	169,315	$	186,587	Total assets	$	323,146	$	259,468

LIABILITIES AND SHAREHOLDERS’ EQUITY	LIABILITIES AND SHAREHOLDERS’ EQUITY					LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:	Current liabilities:					Current liabilities:
Accounts payable	Accounts payable	$	8,064	$	10,044	Accounts payable	$	7,237	$	2,910
Accrued expenses	Accrued expenses	28,877		22,256		Accrued expenses	17,703		13,752

Operating lease liability		583		648
Current operating lease liabilities						Current operating lease liabilities	650		675

Taxes payable	Taxes payable	235		147		Taxes payable	424		283
Other current liabilities	Other current liabilities	144		327		Other current liabilities	509		1,409
Total current liabilities	Total current liabilities	37,903		33,422		Total current liabilities	26,523		19,029

Non-current liabilities:	Non-current liabilities:					Non-current liabilities:

Term loan	Term loan	4,928		4,874		Term loan	19,809		9,768
Operating lease liability		177		286
Non-current operating lease liabilities						Non-current operating lease liabilities	65		205
Total non-current liabilities	Total non-current liabilities	5,105		5,160		Total non-current liabilities	19,874		9,973
Total liabilities	Total liabilities	43,008		38,582		Total liabilities	46,397		29,002

Commitments and contingencies	Commitments and contingencies	0		0		Commitments and contingencies

Shareholders' equity:	Shareholders' equity:					Shareholders' equity:
Ordinary £0.05 par value shares; 494,058,246 and 489,177,550 issued, and 482,944,390 and 480,082,966 outstanding, at March 31, 2022 and December 31, 2021, respectively		32,182		31,855
Ordinary £0.05 par value shares; 651,659,630 and 631,338,246 issued, and 631,987,078 and 606,301,054 outstanding, at March 31, 2023 and December 31, 2022, respectively						Ordinary £0.05 par value shares; 651,659,630 and 631,338,246 issued, and 631,987,078 and 606,301,054 outstanding, at March 31, 2023 and December 31, 2022, respectively	41,753		40,526
Additional paid-in capital	Additional paid-in capital	388,204		385,070		Additional paid-in capital	590,915		529,187
Ordinary shares held in treasury	Ordinary shares held in treasury	(739)		(603)		Ordinary shares held in treasury	(1,208)		(1,549)
Accumulated other comprehensive loss	Accumulated other comprehensive loss	(4,601)		(4,601)		Accumulated other comprehensive loss	(4,601)		(4,601)
Accumulated deficit	Accumulated deficit	(288,739)		(263,716)		Accumulated deficit	(350,110)		(333,097)
Total shareholders' equity	Total shareholders' equity	126,307		148,005		Total shareholders' equity	276,749		230,466
Total liabilities and shareholders' equity	Total liabilities and shareholders' equity	$	169,315	$	186,587	Total liabilities and shareholders' equity	$	323,146	$	259,468

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

Verona Pharma plc

Condensed Consolidated Statements of Operations and Comprehensive Loss

(unaudited)

(in thousands, except per share amounts)


		Three months ended March 31,				Three months ended March 31,
		2022		2021				2023		2022

Operating expenses
Operating expenses:							Operating expenses:
Research and development	Research and development	$	17,625	$	13,574		Research and development	$	12,610	$	17,625
Selling, general and administrative	Selling, general and administrative	7,440		9,282			Selling, general and administrative	9,589		7,440
Total operating expenses	Total operating expenses	25,065		22,856			Total operating expenses	22,199		25,065
Operating loss	Operating loss	(25,065)		(22,856)			Operating loss	(22,199)		(25,065)
Other income/(expense)
Other income/(expense):							Other income/(expense):
Research and development tax credit	Research and development tax credit	1,302		2,070			Research and development tax credit	2,313		1,302
Interest income	Interest income	15		4			Interest income	2,677		15
Interest expense	Interest expense	(84)		(84)			Interest expense	(293)		(84)
Fair value movement on warrants		—		(507)
Foreign exchange (loss)/gain		(923)		163

Foreign exchange gain/(loss)							Foreign exchange gain/(loss)	932		(923)
Total other income, net	Total other income, net	310		1,646			Total other income, net	5,629		310
Loss before income taxes	Loss before income taxes	(24,755)		(21,210)			Loss before income taxes	(16,570)		(24,755)
Income tax expense	Income tax expense	(82)		(80)			Income tax expense	(173)		(82)
Net loss	Net loss	$	(24,837)	$	(21,290)		Net loss	$	(16,743)	$	(24,837)

Loss per ordinary share - basic and diluted	Loss per ordinary share - basic and diluted	$	(0.05)	$	(0.05)		Loss per ordinary share - basic and diluted	$	(0.03)	$	(0.05)

Weighted-average shares outstanding - basic and diluted							Weighted-average shares outstanding - basic and diluted	621,451		481,942

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

Verona Pharma plc

Condensed Consolidated Statements of Shareholders’ Equity

(unaudited)

(in thousands except share data)

Ordinary shares Additional paid-in capital Ordinary shares held in treasury Accumulated other comprehensive loss Accumulated deficit Total shareholders' equity
Number Amount
Balance at January 1, 2022 489,177,550 $ 31,855 $ 385,070 $ (603) $ (4,601) $ (263,716) $ 148,005
Net loss — — — — — (24,837) (24,837)
Issuance of common shares under at-the-market sales agreement 80,696 5 62 — — — 67
Restricted share units vested — — — 186 — (186) —
Issuance of ordinary shares to treasury 4,800,000 322 — (322) — — —
Common shares withheld for taxes on vested stock awards — — (793) — — — (793)
Equity settled share-based compensation reclassified as cash-settled — — 118 — — — 118
Share-based compensation — — 3,747 — — — 3,747
Balance at March 31, 2022 494,058,246 $ 32,182 $ 388,204 $ (739) $ (4,601) $ (288,739) $ 126,307


	Ordinary shares			Additional paid-in capital		Ordinary shares held in treasury		Accumulated other comprehensive loss		Accumulated deficit		Total shareholders' equity
	Number	Amount
Balance at December 31, 2022	631,338,246	$	40,526	$	529,187	$	(1,549)	$	(4,601)	$	(333,097)	$	230,466
Net loss	—	—		—		—		—		(16,743)		(16,743)
Issuance of ordinary shares	20,321,384	1,227		55,682		—		—		—		56,909
Restricted share units vested	—	—		—		270		—		(270)		—

Share options exercised	—	—		1,756		71		—		—		1,827


Share-based compensation	—	—		4,290		—		—		—		4,290
Balance at March 31, 2023	651,659,630	$	41,753	$	590,915	$	(1,208)	$	(4,601)	$	(350,110)	$	276,749

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

Verona Pharma plc

Condensed Consolidated Statements of Shareholders’ Equity

(unaudited)

(in thousands except share data)


		Ordinary shares			Additional paid-in capital				Ordinary shares held in treasury		Accumulated other comprehensive loss		Accumulated deficit				Total shareholders' equity					Ordinary shares				Additional paid-in capital				Ordinary shares held in treasury				Accumulated other comprehensive loss				Accumulated deficit				Total shareholders' equity
		Number	Amount													Number					Amount
Balance at January 1, 2021		488,304,446	$	31,794			$	366,411			$	(1,700)			$	(4,601)			$	(207,050)		$	184,854
Balance at December 31, 2021																				Balance at December 31, 2021		489,177,550		$	31,855			$	385,070			$	(603)			$	(4,601)			$	(263,716)			$	148,005
Net loss	Net loss	—	—		—				—		—		(21,290)				(21,290)			Net loss		—		—		—				—				—				(24,837)				(24,837)

Issuance of common shares under at-the-market sales agreement																				Issuance of common shares under at-the-market sales agreement		80,696		5		62				—				—				—				67
Restricted share units vested	Restricted share units vested	—	—		—				30		—		(30)				—			Restricted share units vested		—		—		—				186				—				(186)				—

Issuance of ordinary shares to treasury																				Issuance of ordinary shares to treasury		4,800,000		322		—				(322)				—				—				—
Common shares withheld for taxes on vested stock awards																				Common shares withheld for taxes on vested stock awards		—		—		(793)				—				—				—				(793)
Equity settled share-based compensation reclassified as cash-settled																				Equity settled share-based compensation reclassified as cash-settled		—		—		118				—				—				—				118
Share-based compensation	Share-based compensation	—	—		8,850				—		—		—				8,850			Share-based compensation		—		—		3,747				—				—				—				3,747
Balance at March 31, 2021		488,304,446	$	31,794	$	375,261			$	(1,670)	$	(4,601)	$	(228,370)			$	172,414
Balance at March 31, 2022																				Balance at March 31, 2022		494,058,246		$	32,182	$	388,204			$	(739)			$	(4,601)			$	(288,739)			$	126,307

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

Verona Pharma plc

Condensed Consolidated Statements of Cash Flows

(unaudited)

(in thousands)


		Three months ended March 31,					Three months ended March 31,
		2022		2021			2023		2022
Operating activities:
Cash flows from operating activities:						Cash flows from operating activities:
Net loss:	Net loss:	$	(24,837)	$	(21,290)	Net loss:	$	(16,743)	$	(24,837)
Adjustments to reconcile net income to net cash used in operating activities:	Adjustments to reconcile net income to net cash used in operating activities:					Adjustments to reconcile net income to net cash used in operating activities:
Foreign exchange loss/(gain)		1,119		(155)
Amortization of debt issue costs		23		19
Foreign exchange (gain)/loss						Foreign exchange (gain)/loss	(932)		1,119
Other non-cash items						Other non-cash items	73		23
Accretion of redemption premium on debt	Accretion of redemption premium on debt	31		31		Accretion of redemption premium on debt	18		31
Fair value movement on warrants		—		507

Share-based compensation	Share-based compensation	3,748		8,850		Share-based compensation	4,290		3,748
Depreciation and amortization		163		153
Depreciation						Depreciation	157		163

Changes in operating assets and liabilities:	Changes in operating assets and liabilities:					Changes in operating assets and liabilities:

Prepaid expenses	Prepaid expenses	2,791		(2,709)		Prepaid expenses	938		2,791
Tax incentive receivable	Tax incentive receivable	(1,578)		(2,012)		Tax incentive receivable	(2,313)		(1,578)
Other current assets	Other current assets	(462)		236		Other current assets	1,362		(462)

Accounts payable	Accounts payable	(1,980)		363		Accounts payable	4,327		(1,980)
Accrued expenses	Accrued expenses	6,621		(2,349)		Accrued expenses	3,951		6,621
Lease liabilities	Lease liabilities	(174)		(210)		Lease liabilities	(165)		(174)
Taxes payable	Taxes payable	88		—		Taxes payable	141		88
Other current liabilities	Other current liabilities	(65)		15		Other current liabilities	(886)		(65)
Net cash used in operating activities	Net cash used in operating activities	(14,512)		(18,551)		Net cash used in operating activities	(5,782)		(14,512)
Cash flows from investing activities:	Cash flows from investing activities:					Cash flows from investing activities:
Purchases of furniture and equipment						Purchases of furniture and equipment	—		—

Net cash provided by investing activities						Net cash provided by investing activities	—		—
Cash flows from financing activities:						Cash flows from financing activities:
Proceeds from issuance of ordinary shares						Proceeds from issuance of ordinary shares	56,862		67

Net cash used in investing activities		—		—
Cash flows from financing activities:

Proceeds from draw under the Oxford Term Loan						Proceeds from draw under the Oxford Term Loan	9,996		—

Payments of withholding taxes from share-based awards	Payments of withholding taxes from share-based awards	(793)		—		Payments of withholding taxes from share-based awards	—		(793)
Proceeds from exercise of share options						Proceeds from exercise of share options	1,827		—

Proceeds from at-the-market sales agreement		67		—
Net cash used in financing activities		(726)		—
Net cash provided by/(used in) financing activities						Net cash provided by/(used in) financing activities	68,685		(726)
Effect of exchange rate changes on cash and cash equivalents	Effect of exchange rate changes on cash and cash equivalents	(378)		163		Effect of exchange rate changes on cash and cash equivalents	685		(378)
Net change in cash and cash equivalents	Net change in cash and cash equivalents	(15,616)		(18,388)		Net change in cash and cash equivalents	63,588		(15,616)
Cash and cash equivalents at beginning of the period	Cash and cash equivalents at beginning of the period	148,380		187,986		Cash and cash equivalents at beginning of the period	227,827		148,380
Cash and cash equivalents at end of the period	Cash and cash equivalents at end of the period	$	132,764	$	169,598	Cash and cash equivalents at end of the period	$	291,415	$	132,764
Supplemental disclosure of cash flow information:	Supplemental disclosure of cash flow information:					Supplemental disclosure of cash flow information:
Income taxes paid	Income taxes paid	$	1	$	—	Income taxes paid	$	—	$	1
Interest paid	Interest paid	$	53	$	55	Interest paid	$	244	$	53

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

Verona Pharma plc

Notes to Condensed Consolidated Financial Statements

(unaudited)

Note 1 - Organization and description of business operations

Verona Pharma plc (the “Company”) is incorporated and domiciled in the United Kingdom. Verona Pharma plc has 1one wholly-owned subsidiary, Verona Pharma, Inc., a Delaware corporation. ~~Rhinopharma Limited, a Canadian company that was previously a non-operating, wholly-owned subsidiary, was dissolved in June 2021.~~ The address of the registered office is 1 Central Square, Cardiff, CF10 1FS, United Kingdom.

The Company is a clinical-stage biopharmaceutical group focused on developing and commercializing innovative therapeutics for the treatment of respiratory diseases with significant unmet medical needs. The Company’s American Depositary Shares (“ADSs”) are listed on the Nasdaq Global Market (“Nasdaq”) and trade under the symbol “VRNA”.

Liquidity

The Company has incurred recurring losses and negative cash flows from operations since inception, and has an accumulated deficit of ~~$288.7~~$350.1 million as of March 31, ~~2022.~~2023. The Company expects to incur additional losses and negative cash flows from operations until its products potentially gain regulatory approval and reach commercial profitability, if at all.

The Company expects that its cash and cash equivalents as of March 31, ~~2022,~~2023, will be sufficient to fund its operating expenses and capital expenditure requirements for at least the next 12 months from the date of issuance.

During the three months ended March 31, 2023, the Company sold 20,321,384 ordinary shares (equivalent to 2,540,173 ADSs) under the at-the-market offering program entered into in March 2021 (the “2021 ATM Program”). The shares sold were at an average price of approximately $2.88 per share (equivalent to $23.08 per ADS), raising aggregate net proceeds of approximately $56.9 million after deducting issuance costs.

In March ~~2021,~~2023 through a registration statement on Form S-3, the Company ~~entered into~~replaced the 2021 ATM Program, with an open market sale agreement with ~~respect~~Jefferies LLC (“Jefferies”) to ~~an at-the-market offering program (the “ATM Program”) under which the Company may issue and~~ sell its ordinary shares, in the form of ADSs, with an aggregate ~~offering price~~gross proceeds of up to ~~$100.0 million.~~

~~During~~$200.0 million, from time-to-time, through an “at the ~~three months ended March 31, 2022, the Company sold 80,696 ordinary shares (equivalent~~market” equity offering program under which Jefferies will act as sales agent (the “2023 ATM Program”). Jefferies is entitled to ~~10,087 ADSs) under the ATM Program,~~a commission at ~~an average price~~a rate of approximately $0.86 per share (equivalent to $6.86 per ADS), raising aggregate net proceeds of approximately $0.1 million after deducting issuance costs. As of March 31, 2022, there remained ordinary shares, in the form of ADSs, with a value up to ~~$99.2 million available for sale under~~3.0% of the ~~ATM Program.~~gross proceeds.

The Company’s commercial revenue, if any, will be derived from sales of products that we do not expect to be commercially available ~~for several years,~~within the year, if ever. Additionally, wethe Company may enter into out-licensing transactions from time to time but there can be no assurance that the ~~company~~Company can secure such transactions in the future. Accordingly, ~~we will~~the Company may need to obtain substantial additional funds to achieve ~~our~~its business objectives including to further advance clinical and regulatory activities, to fund prelaunch and launch related costs and to create an effective sales and marketing organization to commercialize ~~ensifentrine. We~~ensifentrine, if approved. Any such funding will need to ~~seek additional funding~~be obtained through public or private financings, debt financing, collaboration or licensing ~~agreements and~~arrangements or other arrangements. However, there is no guarantee ~~that we~~the Company will be successful in securing additional capital on acceptable terms, or at all.

Note 2 - Basis of presentation and summary of significant accounting policies

Basis of presentation and consolidation

The unaudited condensed consolidated financial statements include the accounts of Verona Pharma plc and its wholly-owned subsidiary Verona Pharma, Inc. All inter-company balances and transactions have been eliminated.

The accompanying unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q have been prepared in conformity with accounting principles generally accepted in the U.S. (“U.S. GAAP”).

~~The unaudited condensed consolidated financial statements presented in this Quarterly Report~~ and should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K filed ~~with the SEC~~ on March ~~3, 2022~~7, 2023 (the ~~“2021~~“2022 Form 10-K”). The Consolidated Balance Sheet as of December 31, ~~2021,~~2022, was derived from audited consolidated financial statements included in the ~~2021~~2022 Form 10-K but does not include all disclosures required by U.S. GAAP for complete financial statements. The Company’s significant accounting policies are described in Note 2 to those consolidated financial statements.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted from these interim financial statements. The unaudited condensed consolidated financial statements reflect all adjustments which in the opinion of management are necessary for a fair statement of results of operations, comprehensive income, financial condition, cash flows and shareholders' equity for the periods presented. Except as otherwise disclosed, all such adjustments are of a normal recurring nature. Operating results for the interim periods are not necessarily indicative of the results that may be expected for the full year.

Segment reporting

Operating segments are defined as components of an enterprise about which separate discrete information is available for evaluation by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company has 1one operating and reportable segment, pharmaceutical development.

Use of estimates

The preparation of interim unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting periods. Significant estimates and assumptions reflected in these unaudited condensed consolidated financial statements include, but are not limited to, the accrual and prepayment of research and development expenses and the fair value of share-based ~~compensation, the fair value of warrants, research and development tax credit and the carrying value of the equity interest in Nuance Pharma (as defined below).~~compensation. Estimates are periodically reviewed in light of changes in circumstances, facts and experience. Changes in estimates are recorded in the period in which they become ~~known. Actual~~known, and actual results could differ from the Company’s estimates.

Recently adopted accounting standards and recent accounting standards not yet adopted

~~There are no recently adopted accounting standards~~In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326)-Measurement of Credit Losses on Financial Instruments. This guidance replaces the current incurred loss impairment methodology.

Under this model, on initial recognition and ~~recent accounting standards not yet adopted~~at each reporting period, an entity is required to recognize an allowance that reflects its current estimate of credit losses expected to be incurred over the life of the financial instrument based on historical experience, current conditions and reasonable and supportable forecasts. The guidance requires a modified retrospective transition approach through a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. This update became effective for the Company ~~believes will~~on January 1, 2023 and the adoption of this update did not have a material impact on the Company’s ~~consolidated~~ financial ~~statements.~~

~~Note 3 - Prepaid expenses~~

~~Prepaid expenses consisted of the following (in thousands):~~

March 31, December 31,
2022 2021
Clinical trial and other development costs $ 452 $ 2,169
Insurance 435 1,555
Other 359 313
Total prepaid expenses $ 1,246 $ 4,037
statements and related disclosures.

Verona Pharma plc

Notes to Condensed Consolidated Financial Statements

(unaudited)

Note 43 - ~~Tax and tax incentive receivables~~

~~Tax and tax incentive receivables consisted of the following (in thousands):~~

March 31, December 31,
2022 2021
Research and development tax credit receivable - U.K. $ 16,420 $ 15,583
Total tax receivable $ 16,420 $ 15,583
Equity interest

The Company ~~conducts research~~entered into a collaboration and ~~development activities including, but not limited to, developing ensifentrine for various indications and delivery methods, and as a result~~license agreement (the “Nuance Agreement”) with Nuance Pharma Limited (“Nuance Pharma”) effective June 9, 2021 (the “Effective Date”), under which the Company ~~benefits~~granted Nuance Pharma the exclusive rights to develop and commercialize ensifentrine in Greater China (China, Taiwan, Hong Kong and Macau). In return, the ~~U.K. from~~Company received an unconditional right to consideration aggregating $40.0 million consisting of $25.0 million in cash and an equity interest, valued at $15.0 million as of the ~~HM Revenue and Customs, or HMRC, small and medium sized enterprises research and development relief, or SME R&D credit, which provides relief against U.K. Corporation Tax.~~Effective Date, in Nuance Biotech, the parent company of Nuance Pharma.

~~Effective~~The equity interest is recorded at cost as the Company has elected to use the measurement alternative for accounting periods starting after April 1, 2021, new rules were introduced whereby the amount of SME R&D tax credit that a business can receive in any one year will be capped at £20,000 plus three times the company’s total Pay As You Earn (“PAYE”) and National Insurance contributions (“NIC”) liability. Exemptions to the cap have been introduced which are available to companies that meet certain conditions.equity investments without readily determinable fair values. The Company ~~believes it~~evaluates this investment for indicators of impairment quarterly. The Company did not identify events or changes in circumstances that may ~~be eligible for an exemption and has requested feedback from HMRC. If~~have a significant effect on the ~~cap does not apply~~fair value of the ~~Company would have recorded $3.6 million relating to~~investment during the ~~quarter~~three months ended March 31, ~~2022 instead of the $1.3 million reported in the condensed consolidated statements of operations. Until we receive this feedback the Company is accounting for the credit as if the cap applied.~~2023.

Note 54 - Accrued expenses

Accrued expenses consisted of the following (in thousands):


		March 31,		December 31,			March 31,		December 31,
		2022		2021			2023		2022
Clinical trial and other development costs	Clinical trial and other development costs	$	27,520	$	21,336	Clinical trial and other development costs	$	15,127	$	12,314
Professional fees and general corporate costs	Professional fees and general corporate costs	846		919		Professional fees and general corporate costs	1,775		1,364
People related costs	People related costs	511		1		People related costs	801		74
Total accrued expenses	Total accrued expenses	$	28,877	$	22,256	Total accrued expenses	$	17,703	$	13,752

Note 65 - Term loan

~~In November 2020,~~On October 14, 2022 (the “Effective Date”), the Company entered into a term loan facility of up to $30.0 million (the “Term Loan”), consisting of advances of $5.0 million funded at closing and $10.0 million and $15.0 million contingent upon achievement of certain clinical development milestones and other specified conditions. As of March 31, 2022, the Company had $5.0 million principal outstanding under the Term Loan.

~~The Term Loan is governed by a~~ loan and security agreement ~~dated as of November 19, 2020, between the Borrowers and SVB, as amended~~ (the “Loan Agreement”) with Oxford Finance Luxembourg S.À R.L. (“Oxford”) for an aggregate amount of up to $150.0 million (the “Oxford Term Loan”). The Oxford Term Loan provides for an initial term loan advance in an aggregate amount of $10.0 million, which was funded on the Effective Date (the “Oxford Term A Loan”), and up to four additional term loan advances in an aggregate amount of $140.0 million. The Oxford Term Loan has a maturity date of October 1, 2027.

On March 24, 2023, the Company received $10.0 million under the second term loan advance (“Oxford Term B Loan”), which was available at the option of the Company from the Effective Date up to and including March 31, 2023. The proceeds of the Oxford Term B Loan will be ~~available, subject~~used for general corporate and working capital purposes as well as to ~~and customary terms and conditions, only during the period commencing upon the achievement of a specific clinical milestone relating~~build out commercial infrastructure to ensifentrine through and including September 30, 2022. The Term C Loan will be available, subject to customary terms and conditions, only during the period commencing upon the achievement of an additional specific clinical milestone relating to ensifentrine through and including June 30, 2023.prepare for potential commercial launch.

The Oxford Term A Loan and Oxford Term B Loan (together, the “Oxford Term Loan ~~will mature on November 1, 2024. Each advance under the Term Loan accrues~~Advances”) bear interest at a ~~floating per annum~~variable rate equal to (a) the greater of ~~(a)~~(i) the ~~sum~~1-Month CME Term SOFR reference rate on the last day of the ~~prime rate reported~~month that immediately precedes the month in ~~The Wall Street Journal~~which the interest will accrue and (ii) 2.38%, plus ~~1.00%~~(b) 5.50% (the “Basic Rate”) and ~~(b) four and one-quarter of one percent (4.25%). The Term Loan provides for interest-only payments on a monthly basis until~~shall not increase by more than 2.00% above the payment date immediately preceding December 1, 2023. Thereafter, amortization payments will be payable monthly in equal installments of principal plus monthly payments of accrued interest. Upon repayment (whether at maturity, upon acceleration or by prepayment or otherwise), the Borrowers shall make a final payment to SVB in the amount of 10%Basic Rate as of the aggregate Term Loans advanced (the "Final Payment"). The Borrowers may prepay the Term Loan in full but not in part provided that the Borrowers (i) provide ten days’ prior written notice to SVB, (ii) pays on thefunding date of each such ~~prepayment (A) all outstanding principal plus accrued~~term loan. For the three months ended March 31, 2023, the effective interest rate was approximately 10% per annum. There was no material difference between the carrying value and ~~unpaid interest, (B) a prepayment fee of $450,000 plus 3.0%~~the estimated fair value of the ~~Term C Loans advanced if paid on or before the~~

~~Verona Pharma plc~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(unaudited)~~

first anniversary of the closing date; $300,000 plus 2.00% of the Term C Loans advanced if paid after the first anniversary of the closing date and on or before the second anniversary of the closing date; and $150,000 plus 1.00% of the Term C Loans advanced if paid thereafter and prior to maturity, (C) the Final Payment and (D) all other sums, if any, that shall become due and payable with respect to theOxford Term Loan Advances including interest at the Default Rate with respect to any past due amounts. Amounts outstanding during an event of default are payable upon SVB's demand and shall accrue interest at an additional rate of 3.0% per annum.

The Term Loan is secured by a lien on substantially all of the assets of the Borrowers, other than the equity interests of Verona U.S. and other than intellectual property, provided that such lien on substantially all assets includes any rights to payments and proceeds from the sale, licensing or disposition of intellectual property. The Borrowers have also granted SVB a negative pledge with respect to its intellectual property.

The Loan Agreement contains customary covenants and representations, including but not limited to financial reporting obligations and limitations on dividends, indebtedness, collateral, investments, distributions, transfers, mergers or acquisitions, taxes, corporate changes, deposit accounts, and subsidiaries. The Loan Agreement also contains other customary provisions, such as expense reimbursement, non-disclosure obligations as well as indemnification rights for the benefit of SVB. The Loan Agreement includes a minimum cash covenant triggered when Borrowers' consolidated cash and cash equivalents drop below $45.0 million at any time after the earliest to occur of any of the following: (i) the release of negative data from ENHANCE-2 and/or ENHANCE-1, which in the reasonable business discretion Borrowers’ senior management, would be considered insufficient to support submission of an NDA to the FDA, (ii) the FDA issues a complete response letter with respect to an NDA submitted for ensifentrine, or (iii) failure to achieve a specific regulatory milestone relating to ensifentrine by June 30, 2023 (extendable to March 31, 2024 upon the Borrowers receiving a specified amount of new cash proceeds after September 8, 2020 from the sale of equity securities in one or more public financings or other bona fide equity financings, subordinated debt and/or upfront/milestone payments from one or more collaboration agreements not prohibited in the Loan Agreement). Upon such trigger, Borrowers must cash collateralize an amount equal to the outstanding obligations to SVB plus the amount of any prepayment penalty and Final Payment which would be due in the event the Loan Agreement were prepaid in full with respect to the Term Loans advanced as of such time.

As of March 31, 2022, the carrying value of the Term Loan was approximately $4.9 million, of which all was due in more than 12 months. The debt balance has been categorized within Level 3 of the fair value hierarchy. The carrying amount of the debt approximates its fair value based on prevailing interest rates as of the balance sheet date.

~~Note 7 - Equity interest~~

The Company follows guidance from ASC 321-10-35-2 and uses the fair value measurement alternative and measures the securities at cost, which is deemed to be the value indicated by the last observable transaction in Nuance Biotech's stock, subject to impairment. The valuation will be adjusted for any observable price changes in orderly transactions for an identical or similar investment in Nuance Biotech, or if there is an indicator of impairment. As of March 31, 2022, there had been no observable transactions to indicate any price changes in the value of Nuance Biotech’s stock, nor had there been any indications of impairment. The equity interest is therefore recorded at a value of $15.0 million.outstanding.

109

Verona Pharma plc

Notes to Condensed Consolidated Financial Statements

(unaudited)

~~Note 8 - Significant agreements~~

~~Ligand agreement~~

In 2006 the Company acquired Rhinopharma and assumed contingent liabilities owed to Ligand UK Development Limited (“Ligand”) (formerly Vernalis Development Limited). The Company refers to the assignment and license agreement as the Ligand Agreement.

Ligand assigned to the Company all of its rights to certain patents and patent applications relating to ensifentrine and related compounds (the “Ligand Patents”) and an exclusive, worldwide, royalty-bearing license under certain Ligand know-how to develop, manufacture and commercialize products (the “Ligand Licensed Products”) developed using Ligand Patents, Ligand know-how and the physical stock of certain compounds.

The contingent liability comprises a milestone payment (the “Milestone Payment”) on obtaining the first approval of any regulatory authority for the commercialization of a Ligand Licensed Product, low single digit royalties based on the future sales performance of all Ligand Licensed Products and a portion equal to a mid-twenty percent of any consideration received from any sub-licensees for the Ligand Patents and for Ligand know-how.

At the time of the acquisition the contingent liability was not recognized as part of the acquisition accounting as it was immaterial. The Company will therefore record as a research and development expense the Milestone Payment or royalties when they are probable.

In March 2022 we entered into an Amendment Agreement (the “Amendment”) with Ligand whereby the Ligand Agreement was amended to clarify certain ambiguous terms in the Ligand Agreement. Pursuant to the Amendment:

•the Company agreed to pay to Ligand (i) $2.0 million within five business days of the date of the Amendment and (ii) $15.0 million upon the first commercial sale of ensifentrine by the Company or a sub-licensee, which amount is payable in cash or, at the Company's discretion, by the issuance of Company equity of equivalent value, as determined based on the volume-weighted average price of the Company's American Depositary Shares on the Nasdaq Global Market over the ten (10) trading days including and prior to such milestone event;

•~~the Ligand Agreement shall expire on March 24, 2042 unless terminated earlier by either party in accordance with its terms;~~

•upon termination of the Ligand Agreement, any Sub-licensee (as defined in the Amendment) shall have the right to enter into a direct license agreement with Ligand for the portion of the Program IP (as defined in the Amendment) that was sub-licensed by such Sub-licensee;

•~~the Milestone Payment may be paid in cash or, at the Company’s discretion, by issuing to Ligand shares in the Company of equivalent value; and~~

•each party’s right to terminate the Ligand Agreement is conditioned upon such party obtaining a final judgment of the English High Court declaring that the other party is in material breach of its obligations under the Ligand Agreement.

The Company accounted for the $2.0 million payment at execution as selling, general and administrative expense in the condensed consolidated statements of operations as the payment is related to a contract modification.

~~Verona Pharma plc~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(unaudited)~~

~~Nuance agreement~~

The Company entered into a collaboration and license agreement (the “Nuance Agreement”) with Nuance Pharma Limited (“Nuance Pharma”) effective June 9, 2021 (the “Effective Date”) under which the Company granted Nuance Pharma the exclusive rights to develop and commercialize ensifentrine in Greater China (China, Taiwan, Hong Kong and Macau). In return, the Company received an unconditional right to consideration aggregating $40.0 million consisting of $25.0 million in cash and an equity interest, valued at $15.0 million as of the Effective Date, in Nuance Biotech, the parent company of Nuance Pharma. The Company is eligible to receive future milestone payments of up to $179.0 million triggered upon achievement of certain clinical, regulatory, and commercial milestones, as well as tiered double-digit royalties as a percentage of net sales of the products in Greater China.

As of March 31, 2022, the $25.0 million cash payment and $15.0 million equity interest had been received and the holding in Nuance Biotech was recorded as Equity Interest on our unaudited condensed consolidated balance sheets included elsewhere in this Quarterly Report on Form 10-Q. The Company follows guidance from ASC 321-10-35-2 and uses the fair value measurement alternative and measures the securities at cost, which is deemed to be the value indicated by the last observable transaction in Nuance Biotech's stock, subject to impairment. The valuation will be adjusted for any observable price changes in orderly transactions for an identical or similar investment in Nuance Biotech, or if there is an indicator of impairment. As of March 31, 2022, there had been no other transactions to indicate any price changes in the value of Nuance Biotech’s stock, nor had there been any indications of impairment. The Equity Interest is therefore recorded at a value of $15 million.

Under the terms of the Nuance Agreement, at any time until three months prior to the expected submission of the first New Drug Application in Greater China, if (i) a third party is interested in partnering with the Company, either globally or in territory covering at least the United States or Europe, for the development and/or commercialization of ensifentrine or (ii) the Company undergoes a change of control, the Company will have an exclusive option right to buy back the license granted to Nuance Pharma and all related assets. The price is agreed to be equal to the aggregate of (i) all prior amounts paid by Nuance Pharma to the Company in cash under the agreement and (ii) all development and regulatory costs incurred and paid by Nuance Pharma in connection with the development and commercialization of ensifentrine under the Nuance Agreement multiplied by a single-digit factor range dependent upon achievement of certain milestones, subject to a specified maximum amount.

The Nuance Agreement will continue on a jurisdiction-by-jurisdiction and product-by-product basis until the expiration of royalty payment obligations with respect to such product in such jurisdiction unless earlier terminated by the parties. Either party may terminate the Nuance Agreement for an uncured material breach or bankruptcy of the other party. Nuance Pharma may also terminate the Nuance Agreement at will upon 90 days' prior written notice.

The Company reviewed the buy-back option and determined that because it is conditional on a third party the Company does not have the practical ability to exercise it and, accordingly, the contract is accounted for under ASC 606.

The transaction price at the Effective Date of the Nuance Agreement was $40.0 million consisting of the $25.0 million upfront cash payment and $15.0 million equity interest. Developmental and regulatory milestones, and the manufacture and supply of ensifentrine drug product, were not included in the transaction price as management determined that it is not probable that a significant reversal in the amount of cumulative revenue recognized will not occur. Commercial milestones and sales royalties were also excluded and will be recognized when the milestones are achieved or the sales occur in Greater China.

The performance obligations in the Nuance Agreement include the grant of the license (including the right to commercialize ensifentrine until the end of the term, the sharing of certain know how, and the sharing of certain clinical and regulatory data), and manufacture and supply of ensifentrine drug product.

The Company has determined that the license and the know how shared with Nuance Pharma constitutes functional intellectual property and that revenue relating to this should be recognized at a point in time. Consequently, the Company determined that it fulfilled its obligations to Nuance Pharma after it delivered the know how that will allow Nuance Pharma to file an investigational new drug application in Greater China. This know how was delivered in the year ended December 31, 2021, and the $40.0 million revenue was therefore recognized as revenue in the year ended December 31, 2021. Revenue relating to the manufacture and supply obligations will be recognized when the drug product is delivered.

~~Verona Pharma plc~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(unaudited)~~

Note 96 - Share-based compensation

The following table shows the allocation of share-based compensation between research and development and selling, general and administrative costs (in thousands):


		Three months ended March 31,				Three months ended March 31,
		2022		2021				2023		2022
Research and development	Research and development	$	1,539	$	3,432		Research and development	$	1,103	$	1,539
Selling, general and administrative	Selling, general and administrative	2,209		5,418			Selling, general and administrative	3,187		2,209
Total	Total	$	3,748	$	8,850		Total	$	4,290	$	3,748

Share options

The following table shows share option activity, in ordinary shares, in the period:

2022
Number of share options outstanding
Weighted average exercise price
Outstanding at January 1 12,695,200 $ 1.38
Granted 608,000 0.62
Outstanding at March 31 13,303,200 $ 1.34


						Number of share options outstanding
Balance as of December 31, 2022						19,276,496
Granted						1,320,000
Forfeited						(240,000)

Exercised						(1,050,192)
Balance as of March 31, 2023						19,306,304

Restricted stock units activity

The following table shows restricted stock unit (“RSU”) activity, in ordinary shares, in the period:

2022
Number of RSUs outstanding Weighted average remaining contractual term (years)
Outstanding at January 1 38,347,352 1.2
Granted 468,224
Vested (3,943,144)
Outstanding at March 31 34,872,432 1.1


						Number of RSUs outstanding
Balance as of December 31, 2022						34,542,344


Vested						(4,305,120)
Balance as of March 31, 2023						30,237,224

1310

Verona Pharma plc

Notes to Condensed Consolidated Financial Statements

(unaudited)

Note 107 - Net loss per share

Net loss per share is calculated on an ordinary share basis. The Company’s ADSs that are listed on ~~the~~ Nasdaq ~~Global Market~~ each represent eight ordinary shares. The following table shows the computation of basic and diluted net loss per share for the ~~periods~~three months ended March 31, 2023 and 2022 ~~and 2021 (net loss in~~(in thousands ~~loss~~except per share ~~in dollars)~~amounts):


		Three months ended March 31,				Three months ended March 31,
		2022		2021				2023		2022
Numerator:	Numerator:						Numerator:
Net loss	Net loss	$	(24,837)	$	(21,290)		Net loss	$	(16,743)	$	(24,837)
Denominator:	Denominator:						Denominator:
Weighted-average shares outstanding - basic and diluted	Weighted-average shares outstanding - basic and diluted	481,941,527		469,465,085			Weighted-average shares outstanding - basic and diluted	621,451		481,942
Net loss per share - basic and diluted	Net loss per share - basic and diluted	$	(0.05)	$	(0.05)		Net loss per share - basic and diluted	$	(0.03)	$	(0.05)

During the three months ended March 31, ~~2022~~2023 and ~~2021,~~2022, outstanding share options, RSUs and warrants over ~~60,576,894~~49.5 million and ~~77,584,846~~60.6 million ordinary shares, respectively, were not included in the computation of diluted earnings per ordinary share, because to do so would be antidilutive.

Note 8 - Commitments and contingencies

Management is currently negotiating a matter with a supplier and has accrued up to the maximum exposure of $6.9 million which is included within Accrued expenses in the Condensed Consolidated Balance Sheets. Management expects that the matter will be resolved within the next 12 months.

1411

Item 2. Management’s discussion and analysis of financial condition and results of operations

You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q, as well as our audited consolidated financial statements and related notes as disclosed in our Annual Report on Form 10-K for the year ended December 31, ~~2021~~2022 filed with the Securities and Exchange Commission on March ~~3, 2022~~7, 2023 (the ~~“2021~~“2022 Form 10-K”).

In addition to historical information, this Quarterly Report on Form 10-Q contains statements that constitute forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “potential” or “continue” or the negative of these terms or other similar expressions, although not all forward-looking statements contain these words.

All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q, including without limitation statements regarding our future results of operations and financial position, business strategy and plans and objectives of management for future operations, the development of ensifentrine or any other product candidates, including statements regarding the expected initiation, timing, progress and availability of data from our clinical trials and potential regulatory approvals and commercialization, research and development costs, timing and likelihood of success, potential collaborations, our estimates regarding expenses, future revenues, capital requirements, debt service obligations and our need for additional financing, the funding we expect to become available from cash receipts from U.K. tax credits and under the $150.0 million debt facility secured in October 2022, and the sufficiency of our cash and cash equivalents to fund operations, are forward-looking statements.

The forward-looking statements in this Quarterly Report on Form 10-Q are only predictions and are based largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. These forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q and are subject to a number of known and unknown risks, uncertainties, assumptions, and other important factors including, but not limited to, those set forth under Part II, Item 1A of this Quarterly Report on Form 10-Q under the heading “Risk Factors” and Part I, Item 1A of the ~~2021~~2022 Form 10-K under the heading “Risk Factors”. Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified and some of which are beyond our control, you should not rely on these forward-looking statements as predictions of future events.

Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events, changed circumstances or otherwise. We intend the forward-looking statements contained in this Quarterly Report on Form 10-Q to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

1512

Overview

We are a clinical-stage biopharmaceutical company focused on developing and commercializing innovative therapeutics for the treatment of respiratory diseases with significant unmet medical need. Our product candidate, ensifentrine, is an investigational, ~~potential~~ first-in-class, inhaled, selective, dual inhibitor of the enzymes phosphodiesterase 3 and 4 (“PDE3” and “PDE4”), ~~which is designed to act as both a~~combining bronchodilator and annon-steroidal anti-inflammatory ~~agent. In~~activities in one compound.

Initially, we are developing inhaled ensifentrine for the ~~third quarter~~treatment of ~~2020~~chronic obstructive pulmonary disease (“COPD”), a common, chronic, progressive, and life-threatening respiratory disease without a cure. If successfully developed and approved, ensifentrine would be the first therapeutic with a novel mode of action for COPD in over a decade.

During 2022, we ~~commenced~~reported positive top-line results from both of our Phase 3 ENHANCE (“Ensifentrine as a Novel inHAled Nebulized COPD thErapy”) trials ~~and, if approved, we intend to commercialize~~evaluating nebulized ensifentrine for the maintenance treatment of ~~chronic obstructive pulmonary disease~~COPD. Ensifentrine met the primary endpoint in both the ENHANCE-1 and ENHANCE-2 trials demonstrating statistically significant and clinically meaningful improvements in measures of lung function. In addition, ensifentrine substantially reduced the rate and risk of COPD exacerbations in ENHANCE-1 and ENHANCE-2. Ensifentrine was well tolerated in both trials.

Based on the results from our ENHANCE program, we believe ensifentrine, if approved, has the potential to change the treatment paradigm for COPD. The totality of data from clinical trials, in particular top-line results from the ENHANCE program, support our belief. We plan to submit a New Drug Application (“~~COPD”~~NDA”) to the U.S. Food and Drug Administration (“FDA”) in the second quarter of 2023 for inhaled ensifentrine for the ~~nebulized formulation~~maintenance treatment of COPD.

If approved, we intend to commercialize inhaled ensifentrine for the maintenance treatment of COPD in the United ~~States.~~States (“U.S.”). Although we believe ensifentrine will not be regulated as a drug device combination, patients use a readily available standard jet nebulizer to take ensifentrine. Outside the U.S., we intend to license ensifentrine to companies with expertise and experience in developing and commercializing products in those regions. To that end, we have entered into a strategic collaboration with Nuance Pharma Limited, a Shanghai-based specialty pharmaceutical company (“Nuance Pharma”), to develop and commercialize ensifentrine in Greater China.

In Phase 2 clinical trials, ensifentrine has demonstrated positive results in patients with COPD, asthma and cystic fibrosis (“CF”). Two additional formulations of ensifentrine have been evaluated in Phase 2 trials for the treatment of COPD: dry powder inhaler (“DPI”) and pressurized metered-dose inhaler (“pMDI”).

We have incurred recurring losses and negative cash flows from operations since inception, and have an accumulated deficit of ~~$288.7~~$350.1 million as of March 31, ~~2022.~~2023. We expect to incur additional losses and negative cash flows from operations until our product candidates potentially gain regulatory approval and reach commercial profitability, if at all.

We anticipate ~~that our~~significant expenses ~~will increase significantly~~ in connection with our ongoing activities, ~~as we:~~

•~~continue to invest in the clinical development of ensifentrine for the treatment of COPD;~~

•~~manufacture ensifentrine and engage in other Chemistry, Manufacturing and Controls activities;~~

•~~maintain, expand and protect our intellectual property portfolio; and~~

•~~build out infrastructure and prepare for commercial launch.~~

We believe that our cash and cash equivalents as of March 31, 2022, expected cash receipts from U.K. tax credits and funding expected to become available under the $30.0 million debt financing facility secured in November 2020, will enable us to fund our planned operating expenses and capital expenditure requirements through at least the end of 2023. The Term Loan advances are contingent upon achievement of certain clinical development milestones and other specified conditions. See “Indebtedness” for additional information.

~~Clinical development update~~

During the first quarter of 2022, we continued enrollment in our Phase 3 ENHANCE clinical program and we are now close to completing enrollment for this program. As of May 2, 2022, approximately 90% of subjects were randomized into ENHANCE-1, and complete enrollment in ENHANCE-1 is expected in the second quarter of 2022. This would conclude enrollment in the Phase 3 ENHANCE program. The Company projects approximately 55-65% of subjects will be receiving background therapy in each study.

Based on our current models of forecasted recruitment and study progress, we expect to report top-line data for ENHANCE-2 in the third quarter of 2022 and for ENHANCE-1 around the end of 2022. The top-line data from both ENHANCE trials will include the primary endpoint, improvement in lung function as measured by average forced expiratory volume in one second (“FEV1”) area under the curve (“AUC”) 0-12 hours post dose at week 12, as well as key secondary endpoints comprising measurements of COPD symptoms and health-related quality of life, including E-RS and SGRQ endpoints, as well as overall safety data.

The design of the ENHANCE program was based on analysis of our two Phase 2b clinical trials, which both enrolled 400 subjects with moderate to severe COPD. This includes similar entry and exclusion parameters as well as key study endpoints. To date, overall population attributes including demographics and baseline COPD characteristics including smoking history, lung function, symptoms and quality of life for subjects in the ENHANCE program are similar to those seen in the Phase 2b trials.

~~Board update~~

In March 2022, James Brady joined our board as a Non-Executive Director. Mr. Brady has extensive experience in the biopharmaceutical industry, serving in multiple leadership roles across the U.S., Europe and China during his 30-plus-year career at AstraZeneca. Most recently, he served as Chief Financial Officer of MedImmune, the biologics discovery and development division of AstraZeneca.

~~COVID-19 impact~~

Verona Pharma continues to monitor the impact of the COVID-19 pandemic on its operations and clinical trials, in particular the timelines and costs of its Phase 3 clinical program ENHANCE. The pandemic and government and other measures in response continue to impact a number of clinical trial activities and the Company will provide an update if it becomes aware of any meaningful disruption caused by the pandemic to its clinical trials.

To help protect the health and safety of the subjects, caregivers and healthcare professionals involved in its clinical trials, as well as its employees and independent contractors, the Company continues to follow guidance from the FDA and other health regulatory authorities regarding the conduct of clinical trials during the COVID-19 pandemic to ensure the safety of study participants, minimize risks to study integrity, and maintain compliance with good clinical practice (GCP).

The COVID-19 pandemic is disrupting supply chains, and employee retention and recruitment, globally and the Company is closely monitoring this situation and will provide an update if it becomes aware of any meaningful disruption caused by the pandemic to the supply of ensifentrine and drug-related products, equipment and services for its clinical trials.

~~Russia-Ukraine Conflict~~

Verona Pharma is conducting its ENHANCE-1 program at a number of clinical trial sites in Russia and Europe (but not including Ukraine). The sanctions and other restrictions imposed by the U.S. and other countries as a result of the current conflict between Russia and Ukraine may impact our outsourced clinical research vendor’s ability to pay the clinical trial sites in Russia, to supply ensifentrine and equipment to the sites, or validate their trial data. If the conflict extends into other countries in Europe where our clinical trials are being conducted, our clinical trial activities in those countries may also be impacted. The Company is closely monitoring the Russia-Ukraine conflict and will provide an update if it becomes aware of any meaningful disruption to the cost and timelines of our Phase 3 program or our plans to submit an NDA for ensifentrine.

~~Significant agreements~~

~~Ligand agreement~~

In 2006 we acquired Rhinopharma and assumed contingent liabilities owed to Ligand UK Development Limited (“Ligand”) (formerly Vernalis Development Limited). We refer to the assignment and license agreement as the Ligand Agreement.

Ligand assigned to us all of its rights to certain patents and patent applications relating to ensifentrine and related compounds (the “Ligand Patents”) and an exclusive, worldwide, royalty-bearing license under certain Ligand know-how to develop, manufacture and commercialize products (the ”Ligand Licensed Products”) developed using Ligand Patents, Ligand know-how and the physical stock of certain compounds.

At time of the acquisition the contingent liability was not recognized as part of the acquisition accounting as it was immaterial. We will therefore record as a research and development expense the Milestone Payment or royalties when they are probable.

•we agreed to pay to Ligand (i) $2.0 million within five business days of the date of the Amendment and (ii) $15.0 million upon the first commercial sale of ensifentrine by us or a sub-licensee, which amount is payable in cash or, at the our discretion, by the issuance of Company equity of equivalent value, as determined based on the volume-weighted average price of the our American Depositary Shares on the Nasdaq Global Market over the ten (10) trading days including and prior to such milestone event;

•~~the Ligand Agreement shall expire on March 24, 2042 unless terminated earlier by either party in accordance with its terms;~~

• upon termination of the Ligand Agreement, any Sub-licensee (as defined in the Amendment) shall have the right to enter into a direct license agreement with Ligand for the portion of the Program IP (as defined in the Amendment) that was sub-licensed by such Sub-licensee;

•~~the Milestone Payment may be paid in cash or, at our discretion, by issuing to Ligand shares in the Company of equivalent value; and~~

~~Nuance agreement~~

We entered into a collaboration and license agreement (the “Nuance Agreement”) with Nuance Pharma Limited (“Nuance Pharma”) effective June 9, 2021 (the “Effective Date”) under which we granted Nuance Pharma the exclusive rights to develop and commercialize ensifentrine in Greater China (China, Taiwan, Hong Kong and Macau). In return, we received an unconditional right to consideration aggregating $40.0 million consisting of $25.0 million in cash and an equity interest valued at $15.0 million as of the Effective Date in Nuance Biotech, the parent company of Nuance Pharma. We are eligible to receive future milestone payments of up to $179.0 million, triggered upon achievement of certain clinical, regulatory, and commercial milestones as well as tiered double-digit royalties on net sales in Greater China.

As of March 31, 2022, the $25.0 million cash payment and $15.0 million equity interest had been received and the holding in Nuance Biotech was recorded as Equity Interest on our unaudited condensed consolidated balance sheet included elsewhere in this Quarterly Report on Form 10-Q. The equity interest is recorded at the fair value indicated by the last observable transaction in Nuance Biotech’s stock, which was a fund raising in November, 2020. As of March 31, 2022, there had been no other observable transactions to indicate any price changes in the value of Nuance Biotech’s stock, nor had there been any indications of impairment. The equity interest is therefore recorded at a value of $15.0 million.

Nuance Pharma will be responsible for all costs related to clinical development and commercialization of ensifentrine in Greater China. A joint steering committee has been established between us and Nuance Pharma to oversee and coordinate the overall conduct of such clinical development and commercialization. We intend to use the joint steering committee to help ensure the clinical development of ensifentrine in Greater China aligns with our overall global development and commercialization strategy.

Under the terms of the Nuance Agreement, at any time until three months prior to the expected submission of the first New Drug Application in Greater China, if (i) a third party is interested in partnering with us, either globally or in territory covering at least the United States or Europe, for the development and/or commercialization of ensifentrine or (ii) we undergo a change of control, we will have an exclusive option right to buy back the license granted to Nuance Pharma and all related assets. The price is agreed to be equal to the aggregate of (i) all prior amounts paid by Nuance Pharma to us in cash under the agreement and (ii) all development and regulatory costs incurred and paid by Nuance Pharma in connection with the development and commercialization of the ensifentrine under the Nuance Agreement multiplied by a single-digit factor range dependent upon achievement of certain milestones, subject to a specified maximum amount.

We reviewed the buy-back option and determined that because it is conditional on a third party we do not have the practical ability to exercise it and, accordingly, the contract is accounted for under ASC 606.

The transaction price at the Effective Date of the Nuance Agreement was $40.0 million consisting of the $25.0 million upfront cash payment and $15.0 million equity interest. Developmental and regulatory milestones, and the manufacture and supply of ensifentrine drug product, were not included in the transaction price as we determined that it is not probable that a significant reversal in the amount of cumulative revenue recognized will not occur. Commercial milestones and sales royalties were also excluded and will be recognized when the milestones are achieved or the sales occur in Greater China.

We have determined that the license and the know how shared with Nuance Pharma constitutes functional intellectual property and that revenue relating to this should be recognized at a point in time. Consequently, we have determined that we fulfilled our obligations to Nuance Pharma when we delivered the know how that will allow Nuance Pharma to file an investigational new drug application in Greater China. We delivered this know how in the year ended December 31, 2021, and the $40.0 million revenue was therefore recognized as revenue in the year ended December 31, 2021. Revenue relating to the manufacture and supply obligations will be recognized when the drug product is delivered.

On the Effective Date, $4.0 million of costs of obtaining the contract were recorded as a contract asset. The entire cost had been recognized as Selling, General and Administrative expense in the Consolidated Statement of Operations, in line with recognition of the revenue relating to the contract in the year ended December 31, 2021.

For additional information regarding the Nuance Agreement, see Note 7 to our unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q.

~~Warrants~~

On July 29, 2016, as part of a private placement we issued warrants to investors. The warrant holders can subscribe for an ordinary share at a per share exercise price of £1.7238. They can also opt for a cashless exercise of their warrants whereby they can choose to exchange the warrants held for a reduced number of warrants exercisable at nil consideration.

If, after a transaction, should the warrants be exercisable for unlisted securities, the warrant holders may demand a cash payment instead of the delivery of the underlying securities. Accordingly, they are accounted for as a liability under ASC 480 “Distinguishing Liabilities from Equity” and recorded at fair value using the Black-Scholes valuation methodology, on recognition and at each reporting date. The warrants were exercisable by the holders until May 2, 2022 the warrants are now expired.

~~Loan and security agreement~~

~~In November 2020 we and Verona Pharma Inc. entered into a term loan facility of up to $30.0 million with Silicon Valley Bank (the “Term Loan”). See “Indebtedness” for additional information.~~

~~Critical accounting estimates~~

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the U.S. (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting periods. Significant estimates and assumptions reflected in these consolidated financial statements include, but are not limited to, the recognition of revenue, the accrual and prepayment of research and development expenses, the fair value of share-based compensation, the carrying value of the equity interest in Nuance Pharma (as defined below), research and development tax credit and the fair value of warrants. Estimates are periodically reviewed in light of changes in circumstances, facts and experience. Changes in estimates are recorded in the period in which they become known. Actual results could differ from our estimates. The accounting policies considered to be critical to the judgments and estimates used in the preparation of our financial statements are disclosed in the Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our 2021 Form 10-K. There have been no material changes to that information disclosed in our 2021 Form 10-K during the three months ended March 31, 2022.

~~Components of results of operations~~

~~We anticipate that our expenses will increase substantially~~ if and as we:

•~~conduct~~establish a sales, marketing and distribution infrastructure, ramp up production to commercial scale with our ~~ongoing Phase 3 clinical trials~~manufacturing and other Chemistry, Manufacturing and Controls activities to potentially commercialize any products for ~~ensifentrine for the maintenance treatment of COPD;~~which we may obtain regulatory approval;

•continue the clinical development of our DPI and pMDI formulations of ensifentrine and research and develop other formulations of ensifentrine;

•initiate and conduct further clinical trials for ensifentrine for the treatment of acute COPD, CF or any other indication;

•initiate and progress pre-clinical studies relating to other potential indications of ensifentrine;

•seek to discover and develop additional product candidates;

•seek regulatory approvals for any of our product candidates that successfully complete clinical trials;

•~~potentially establish a sales, marketing and distribution infrastructure and scale-up manufacturing capabilities to commercialize any products for which we may obtain regulatory approval;~~

•maintain, expand and protect our intellectual property portfolio;

•add clinical, scientific, operational, financial and management information systems and personnel, including personnel to support our product development and potential future commercialization efforts and to support our continuing operations as a U.S. public company; orand

•experience any delays or encounter any issues from any of the above, including but not limited to failed studies, complex results, safety issues or other regulatory challenges.

We believe that our cash and cash equivalents as of March 31, 2023, together with expected cash receipts from U.K. tax credit program and funding expected to become available under the $150.0 million debt financing facility secured in October 2022 (the “Oxford Term Loan”), will enable us to fund our planned operating expenses and capital expenditure requirements through at least the end of 2025, including the planned commercial launch of ensifentrine in the U.S., if approved. The Oxford Term Loan advances are contingent upon achievement of certain clinical and regulatory milestones and other specified conditions. Refer to Note 5 - Term Loan to the condensed consolidated financial statements for additional information on the Oxford Term Loan.

~~Operating expenses~~Clinical development update

Phase 3 ENHANCE program

We reported positive top-line results from ENHANCE-2 and ENHANCE-1, in August and December 2022, respectively. Ensifentrine successfully met the primary endpoints in both trials, demonstrating statistically significant and clinically meaningful improvements in measures of lung function in moderate to severe COPD patients. Improvements in symptoms and quality of life measures were shown in both trials, which reached statistical significance in ENHANCE-1. Ensifentrine substantially reduced the rate and risk of moderate to severe COPD exacerbations and was well tolerated in both trials.

The ENHANCE trials were designed to evaluate ensifentrine as monotherapy and added onto a single bronchodilator. Each trial enrolled approximately 800 subjects, for a total of approximately 1,600 subjects, at sites primarily in the U.S. and Europe. The two trials provided replicate evidence of efficacy and safety data over 24 weeks and ENHANCE-1 also evaluated longer-term safety in approximately 400 subjects over 48 weeks.

Subject demographics and disease characteristics were well balanced between treatment groups in both trials.

•In ENHANCE-1 approximately 69% of subjects received background COPD therapy, either a long-acting muscarinic antagonist (“LAMA”) or a long-acting beta-antagonist (“LABA”). Additionally, approximately 20% of all subjects received inhaled corticosteroids (“ICS”) with concomitant LAMA or LABA.

•In ENHANCE-2 approximately 55% of subjects received background COPD therapy, either a LAMA or a LABA. Additionally, approximately 15% of all subjects received ICS with concomitant LAMA or LABA.

Highlights

Primary endpoint met (FEV1*AUC 0-12 hr)

•Placebo corrected, change from baseline in average FEV1 area under the curve 0-12 hours post dose at week 12 was 87 mL (p<0.0001) for ensifentrine in ENHANCE-1 and 94 mL (p<0.0001) for ensifentrine in ENHANCE-2.

•Demonstrated consistent improvements with ensifentrine in all subgroups including gender, age, smoking status, COPD severity, background medication, ICS use, chronic bronchitis, FEV1 reversibility and geographic region.

Secondary endpoints evaluating lung function met:

•Placebo corrected, increase in peak FEV1 of 147 mL (p<0.0001) 0-4 hours post dose at week 12 in ENHANCE-1 and 146 mL (p<0.0001) in ENHANCE-2.

•Placebo corrected, increase in morning trough FEV1 of 35 mL (p=0.0413) at week 12 in ENHANCE-1 and 49 mL (p=0.0016) in ENHANCE-2, supporting twice daily dosing regimen.

Exacerbation rate and risk reduced

•Subjects receiving ensifentrine demonstrated a 36% reduction in the rate of moderate to severe COPD exacerbations over 24 weeks (p=0.0503) compared to those receiving placebo in ENHANCE-1 and a 43% reduction (p=0.0090) in ENHANCE-2.

•In pooled exacerbation data from ENHANCE-1 and ENHANCE-2, ensifentrine demonstrated a 40% reduction in the rate of moderate to severe COPD exacerbations over 24 weeks (p=0.0012) compared to those receiving placebo.

•Treatment with ensifentrine significantly decreased the risk of a moderate/severe exacerbation as measured by time to first exacerbation when compared with placebo by 38% (p=0.0382) in ENHANCE-1 and by 42% (p=0.0089) in ENHANCE-2.

•In pooled exacerbation data from ENHANCE-1 and ENHANCE-2, ensifentrine significantly decreased the risk of a moderate/severe exacerbation as measured by time to first exacerbation when compared with placebo by 41% (p=0.0009).

COPD symptoms and Quality of Life (“QOL”)

•In ENHANCE-1, daily symptoms as measured by E-RS** Total Score in the ensifentrine group improved from baseline to greater than the minimal clinically important difference (“MCID”) of -2 units with a statistically significant improvement compared to placebo at week 24. Improvements in symptoms were early and sustained with statistical significance versus placebo at weeks 6, 12 and 24. Similar improvements were demonstrated in ENHANCE-2 but statistical significance was not achieved due to improvements observed in the placebo group over time.

•In ENHANCE-1, QOL as measured by SGRQ** Total Score in the ensifentrine group improved from baseline to greater than the MCID of -4 units with a statistically significant improvement compared to placebo at week 24. Improvements in QOL were early and sustained with statistical significance versus placebo at weeks 6, 12 and 24. In ENHANCE-2, QOL as measured by SGRQ* Total Score in the ensifentrine group also improved from baseline to greater than the MCID of -4 units at weeks 12 and 24, numerically exceeding placebo at each measurement, but statistical significance was not achieved due to improvements observed in the placebo group over time.

Favorable safety profile

•Ensifentrine was well tolerated with very few adverse events occurring in more than 1% of subjects and greater than placebo over 24 and 48 weeks.

*FEV1: Forced Expiratory Volume in one second, a standard measure of lung function

**E-RS, Evaluating Respiratory Symptoms, and SGRQ, St. George’s Respiratory Questionnaire, are validated patient reported outcome tools

Nuance Pharma

In April 2023, our development partner, Nuance Pharma, dosed the first subject in its pivotal Phase 3 clinical trial evaluating ensifentrine for the maintenance treatment of COPD in mainland China. In August 2022, Nuance Pharma received clearance from the Center of Drug Evaluation for its Investigational New Drug application to conduct both Phase 1 and Phase 3 studies with ensifentrine for the maintenance treatment of COPD in mainland China. Nuance Pharma initiated a Phase 1 trial with ensifentrine in healthy volunteers in March 2023. In 2021, we entered into an agreement with Nuance Pharma for exclusive rights to develop and commercialize ensifentrine in Greater China, with future potential milestone payments up to $179 million plus royalties.

Critical accounting estimates

There were no material changes to the Company’s critical accounting estimates described in the Company’s 2022 Form 10-K during the three months ended March 31, 2023.

Components of results of operations

Research and development costs

Research and development costs consist of salary and personnel related costs and third party costs for our research and development activities for ensifentrine. Personnel related costs include a share-based compensation charge relating to our stock option plan. The largest component of third party costs is for clinical trials, as well as manufacturing for clinical supplies and associated development, and pre-clinical studies. Research and development costs are expensed as incurred.

WeAs the Phase 3 ENHANCE program is nearing completion, we expect our research and development costs to ~~essentially remain at current levels through at least~~decrease over the ~~first half of 2022 as we progress our ENHANCE program. Until~~next several quarters until we add new compounds or develop ensifentrine further in other delivery methods or ~~indications, we expect our research and development costs to begin to decrease in the second half of 2022.~~indications. Due to the nature of research and development, the expected costs are inherently uncertain and may vary significantly from our current expectations.

Selling, general and administrative costs

Selling, general and administrative costs consist of salary and personnel related costs, including share-based compensation, expenses relating to operating as a public company, including professional fees, insurance and commercial related costs, as well as other operating expenses.

We expect commercial costs to increase as we continue to develop our ~~potential~~ commercial operations, prepare for a potential launch and, in the event of successful regulatory approval, ~~we expect to~~ incur sales force, marketing and other launch related costs. As we develop our knowledge of the market and refine our commercialization plans, expected costs may vary significantly from our current expectations.

Other income/(expense)

Other income/(expense) are driven by interest income and expense, ~~the fair value movement of the warrant liability,~~ foreign exchange movements on cash and cash equivalents and taxes receivable, and the U.K. research and development tax credits.

We ~~are entitled to~~ participate in the U.K. Small and Medium Enterprises research and development tax relief program. The tax credits are calculated as a percentage of qualifying research and development expenditure and are payable in cash by the U.K. government to us. Credits recorded in the ~~2021~~2022 financial year are expected to be received in the ~~2022 financial year.~~

~~Effective January 1, 2022, this tax credit will be subject to a cap equal to a multiple~~fourth quarter of ~~employment taxes the entity pays in the year in question. We are currently reviewing the impact these changes could have on our tax credit for the 2022 financial year, receivable in~~ 2023.

Taxation

We are subject to corporate taxation in the ~~United States~~U.S. and the United Kingdom. We have generated losses since inception and have therefore not paid United Kingdom corporation tax. The income taxes presented in our ~~consolidated statements~~Condensed Consolidated Statements of ~~operations~~Operations and ~~comprehensive loss represents~~Comprehensive Loss represent the tax impact from our operating activities in the ~~United States,~~U.S., which generates taxable income based on intercompany service arrangements.

United Kingdom losses may be carried forward indefinitely to be offset against future taxable profits, subject to various utilization criteria and restrictions. The amount that can be offset each year is limited to £5.0 million plus an incremental 50% of U.K. taxable profits.

2117

Results of operations for the three months ended March 31, ~~2022~~2023 and ~~2021~~2022

The following table shows our statements of operations for the three months ended March 31, ~~2022~~2023 and ~~2021~~2022 (in thousands):


		Three months ended March 31,							Three months ended March 31,
		2022		2021		Change			2023		2022		Change

Operating expenses
Operating expenses:								Operating expenses:
Research and development	Research and development	$	17,625	$	13,574	$	4,051	Research and development	$	12,610	$	17,625	$	(5,015)
Selling, general and administrative	Selling, general and administrative	7,440		9,282		(1,842)		Selling, general and administrative	9,589		7,440		2,149
Total operating expenses	Total operating expenses	25,065		22,856		2,209		Total operating expenses	22,199		25,065		(2,866)
Operating loss	Operating loss	(25,065)		(22,856)		(2,209)		Operating loss	(22,199)		(25,065)		2,866
Other income/(expense)
Other income/(expense):								Other income/(expense):
Research and development tax credit	Research and development tax credit	1,302		2,070		(768)		Research and development tax credit	2,313		1,302		1,011
Interest income	Interest income	15		4		11		Interest income	2,677		15		2,662
Interest expense	Interest expense	(84)		(84)		—		Interest expense	(293)		(84)		(209)
Fair value movement on warrants		—		(507)		507
Foreign exchange (loss)/gain		(923)		163		(1,086)

Foreign exchange gain/(loss)								Foreign exchange gain/(loss)	932		(923)		1,855
Total other income, net	Total other income, net	310		1,646		(1,336)		Total other income, net	5,629		310		5,319
Loss before income taxes	Loss before income taxes	(24,755)		(21,210)		(3,545)		Loss before income taxes	(16,570)		(24,755)		8,185
Income tax expense	Income tax expense	(82)		(80)		(2)		Income tax expense	(173)		(82)		(91)
Net loss	Net loss	$	(24,837)	$	(21,290)	$	(3,547)	Net loss	$	(16,743)	$	(24,837)	$	8,094

Research and development costs

Research and development costs were $12.6 million for the three months ended March 31, 2023, compared to $17.6 million for the three months ended March 31, 2022, ~~compared to $13.6 million for the three months ended March 31, 2021, an increase~~a decrease of ~~$4.0~~$5.0 million. This ~~increase~~decrease was primarily due to a ~~$5.6~~$5.1 million ~~increase~~decrease in clinical trial and other development costs as ~~we progressed our~~the Phase 3 ENHANCE program ~~offset by a $2.0 million decrease~~is in ~~share-based compensation charges.~~the final stages of completing data analysis whereas in the same period in the prior year significant costs were incurred associated with active enrollment. Research and development costs for the three months ended March 31, 2023 include the impact of the accrual related to the supplier matter as discussed in Note 8.

Selling, general and administrative costs

Selling, general and administrative costs were $9.6 million for the three months ended March 31, 2023, compared to $7.4 million for the three months ended March 31, 2022, ~~compared~~an increase of $2.1 million. This increase was primarily due to ~~$9.3~~a $2.7 million increase in people related costs, inclusive of share-based compensation, as well as an increase of $0.8 million for costs related to the ~~three months ended March 31, 2021,~~build out of commercial infrastructure in preparation for a ~~decrease of $1.9 million. This decrease was driven primarily by a $3.1 million decrease in share-based compensation charges and a $0.6 million decrease in professional fees,~~potential commercial launch. The increases were partially offset by a non-recurring $2.0 million charge related to the modification of the assignment and license agreement with Ligand ~~Agreement.~~UK Development Limited, which was incurred in the three months ended March 31, 2022.

Other income/(expense)

~~The research and development tax credit~~Other income/(expense) for the three months ended March 31, ~~2022~~2023 was ~~$1.3~~income of $5.6 million compared to ~~$2.1 million for the three months ended March 31, 2021, a decrease~~income of $0.8 million. The decrease is due to changes in the SME R&D tax credit program that established a cap limiting the research and development tax credit to £20,000 plus three times UK pay as you earn and national insurance taxes.

We recorded no income in the three months ended March 31, 2022, compared to a charge of $0.5 million in the comparative period relating to the fair value movements of the warrants. In the three months ended March 31, 2021, there was a loss due to a rise in the share price in that period and greater volatility.

~~Net loss~~

~~Net loss was $24.8~~$0.3 million for the three months ended March 31, 2022, ~~compared~~an increase of $5.3 million. This increase was primarily due to ~~$21.3~~increases of $2.7 million ~~for~~in interest income on higher cash balances and higher interest rates, $1.9 million related to the ~~three months ended March 31, 2021, because~~strengthening of the ~~factors outlined above.~~pound sterling and $1.0 million relating to the R&D tax credit and was partially offset by an increase in interest expense.

2218

Cash flows

The following table summarizes our cash flows for the three months ended March 31, ~~2022~~2023 and ~~2021~~2022 (in thousands):


		Three months ended March 31,							Three months ended March 31,
		2022		2021		Change			2023		2022		Change
Cash and cash equivalents at beginning of the period	Cash and cash equivalents at beginning of the period	$	148,380	$	187,986	$	(39,606)	Cash and cash equivalents at beginning of the period	$	227,827	$	148,380	$	79,447
Net cash used in operating activities	Net cash used in operating activities	(14,512)		(18,551)		4,039		Net cash used in operating activities	(5,782)		(14,512)		8,730
Net cash used in investing activities		—		—		—
Net cash used in financing activities		(726)		—		(726)
Net cash provided by investing activities								Net cash provided by investing activities	—		—		—
Net cash provided by/(used in) financing activities								Net cash provided by/(used in) financing activities	68,685		(726)		69,411
Effect of exchange rate changes on cash and cash equivalents	Effect of exchange rate changes on cash and cash equivalents	(378)		163		(541)		Effect of exchange rate changes on cash and cash equivalents	685		(378)		1,063
Cash and cash equivalents at end of the period	Cash and cash equivalents at end of the period	$	132,764	$	169,598	$	(36,834)	Cash and cash equivalents at end of the period	$	291,415	$	132,764	$	158,651

Operating activities

Net cash used in operating activities was ~~$14.5~~$5.8 million in the three months ended March 31, ~~2022,~~2023, compared to ~~$18.6~~$14.5 million during the three months ended March 31, ~~2021,~~2022, a decrease of ~~$4.1~~$8.7 million. ~~This~~The decrease ~~is predominantly~~in cash used in operating activities was primarily due to the decrease in clinical trial and other development costs as we are in the final stages of completing data analysis related to our Phase 3 ENHANCE program whereas in the same period in the prior year we had significant costs associated with active enrollment as well as the timing of ~~supplier~~ payments.

Financing activities

Net cash ~~used in~~provided by financing activities was ~~$0.7~~$68.7 million in the three months ended March 31, ~~2022,~~2023, compared to ~~$0.0~~$0.7 million ~~provided~~net cash used in the three months ended March 31, ~~2021. This consisted~~2022, an increase of ~~$0.8 million for payment~~$69.4 million. The increase of ~~withholding taxes~~cash provided by financing activities was primarily due onto the ~~net-settling of certain employees’ RSU awards, partially offset by $0.1 million generated~~proceeds from ~~the~~ issuance of ~~ADSs~~ordinary shares of $56.9 million and the proceeds from draw under the ~~ATM Program.~~Oxford Term Loan of $10.0 million.

2319

Liquidity and capital resources

We do not currently have any approved products and have never generated any revenue from product sales. To date, we have financed our operations primarily through the issuances of our equity securities, including warrants, from borrowings under ~~the Term Loan~~term loan facilities and from upfront payments from the Nuance Agreement. ~~See “Significant Agreements” and “Indebtedness” for additional information.~~

We have incurred recurring losses since inception, including net losses of ~~$24.8~~$16.7 million for the three months ended March 31, ~~2022,~~2023, and ~~$55.6~~$68.7 million for the year ended December 31, ~~2021.~~2022. As of March 31, ~~2022,~~2023, we had an accumulated deficit of ~~$288.7~~$350.1 million. We expect to continue to generate operating losses for the foreseeable future.

We have no ongoing material financing commitments, such as lines of credit or guarantees, that are expected to affect our liquidity over the next five years, other than leases and the Oxford Term ~~Loan with Silicon Valley Bank.~~Loan.

~~Open market sale agreement~~2023 Financing and Capital Transactions

InDuring thethree months ended March 31, 2023, we completed the following financing and capital transactions

•Received $10.0 million under the second term loan advance related to the Oxford Term Loan;

•Sold 20,321,384 ordinary shares (equivalent to 2,540,173 ADSs) under the at-the-market offering program entered into in March 2021 ~~we entered into~~(the “2021 ATM Program”), at an average price of approximately $2.88 per share (equivalent to $23.08 per ADS), raising aggregate net proceeds of approximately $56.9 million after deducting issuance costs;

•Replaced the 2021 ATM Program, with an open market sale agreement with Jefferies LLC (“Jefferies”) to sell ~~shares of~~ our ordinary shares, in the form of ADSs, with aggregate gross ~~sales~~ proceeds of up to ~~$100.0 million, from time~~$200.0 million.

Refer also to ~~time, through an “at~~Note 5 - Term Loan to the ~~market” equity offering program under which Jefferies will act as sales agent (the “ATM Program”).~~

~~During~~condensed consolidated financial statements for additional information on the ~~three months ended March 31, 2022, we sold 80,696 ordinary shares (equivalent~~Oxford Term Loan and to ~~10,087 ADSs)~~Note 1 - Organization and description of business operations to the condensed consolidated financial statements for additional information on 2023 activity under the ATM Program, at an average price of approximately $0.86 per share (equivalent to $6.86 per ADS), raising aggregate net proceeds of approximately $0.1 million after deducting issuance costs. As of March 31, 2022, $99.2 million of ordinary shares, in the form of ADSs, remained available for sale under the2021 ATM Program.

~~Indebtedness~~

In November 2020, we and Verona Pharma, Inc. entered into a term loan facility of up to $30.0 million with Silicon Valley Bank, which we refer to as the Term Loan, consisting of term loan advances in an aggregate amount of $5.0 million funded at closing, a term loan advance of an aggregate amount of $10.0 million available subject to certain terms and conditions and the achievement of a specific clinical milestone, and a term loan advance of an aggregate amount of $15.0 million contingent upon achievement of a specific clinical development milestone and other specified conditions. As of March 31, 2022, the Company had $5.0 million principal outstanding under the Term Loan. Additional detail surrounding the Term Loan is included under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2021 Form 10-K. There have been no material changes to that information disclosed in our 2021 Form 10-K during the three months ended March 31, 2022.

Funding requirements

We believe that our cash and cash equivalents as of March 31, ~~2022,~~2023, together with, expected cash receipts from U.K. tax credits and additional funding expected to become available under the Oxford Term Loan, will enable us to fund our planned operating expenses and capital expenditure requirements through at least the end of ~~2023. The~~2025, including the planned commercial launch of nebulized ensifentrine for COPD maintenance treatment in the U.S. Future advances under the Oxford Term Loan ~~advances~~ are contingent upon achievement of certain clinical ~~development~~and regulatory milestones and other specified conditions. Our cash and cash equivalents are maintained at financial institutions in amounts that exceed federally insured limits. In the event of failure of any of the financial institutions where we maintain our cash and cash equivalents, there can be no assurance that we will be able to access uninsured funds in a timely manner or at all.

We ~~will~~may require ~~significant~~ additional capital to ~~further advance~~commercialize ensifentrine, to continue the clinical development of our DPI and ~~regulatory activities, to fund prelaunch and launch related costs~~pMDI formulations of ensifentrine and to ~~create an effective sales~~research and ~~marketing organization~~develop additional formulations of or with ensifentrine. In addition, we may seek to ~~commercialize ensifentrine.~~initiate or conduct preclinical or clinical studies with ensifentrine in additional indications or to discover or in-license and develop additional product candidates. We ~~will~~may need to seek additional funding through public or private financings, debt financing, collaboration or licensing agreements and other arrangements. However, there is no guarantee that we will be successful in securing additional capital on acceptable terms, or at all.

To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our shareholders and ADS holders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect such holders’ rights as a shareholder or ADS holder. Any future debt financing or preferred equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends and may require the issuance of warrants, which could potentially dilute our security holders’ ownership interests.

If we raise additional funds through collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product

candidates or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product

development programs or any future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.

Our future capital requirements for ensifentrine or any future product candidates will depend on many factors, including:

•the progress, timing and completion of pre-clinical testing and clinical trials for ensifentrine or any future product candidates and the potential that we may be required to conduct additional clinical trials for ensifentrine;

•the number of potential new product candidates we decide to in-license and develop;

•the costs involved in growing our organization to the size needed to allow for the research, development and potential commercialization of ensifentrine or any future product candidates;

•the costs involved in filing patent applications and maintaining and enforcing patents or defending against claims or infringements raised by third parties;

•the time and costs involved in obtaining regulatory approvals for ensifentrine or any future product candidate we develop and any delays we may encounter as a result of evolving regulatory requirements or adverse results with respect to ensifentrine or any future product candidates;

•any licensing or milestone fees we might have to pay during future development of ensifentrine or any future product candidates;

•selling and marketing activities undertaken in connection with the anticipated commercialization of ensifentrine or any future product candidates, if approved, and costs involved in the creation of an effective sales and marketing organization; and

•the amount of ~~revenues,~~revenue, if any, we may derive either directly or in the form of royalty payments from future sales of ensifentrine or any future product candidates, if approved.

Our commercial ~~revenues,~~revenue, if any, will be derived from sales of products that we do not expect to be commercially available ~~for several years,~~within the next year, if ever. Accordingly, we ~~will~~may need to obtain substantial additional funds to achieve our business objectives.

~~Recent accounting pronouncements~~

~~For a discussion of pending and recently adopted accounting pronouncements, see Note 2 to our consolidated financial statements included in the 2021 Form 10-K.~~

2521

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are a smaller reporting company as defined in Rule 12b-2 of the Exchange Act and are not required to provide the information otherwise required under this Item 3.

Item 4. Controls and Procedures

Limitations on Effectiveness of Controls and Procedures

In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)) under the Exchange Act as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our principal executive officer and principal financial officer have concluded that, as of March 31, ~~2022,~~2023, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the quarter ended March 31, ~~2022~~2023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

2622

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

We are not currently subject to any material legal proceedings.

Item 1A. �� Risk Factors

Our business is subject to risks and events that, if they occur, could adversely affect our financial condition and results of operations and the trading price of our securities. ~~Our~~Except as discussed below, our risk factors have not changed materially from those described in Part I, Item 1A of the ~~2021~~2022 Form 10-K under the heading “Risk Factors”.

We will need additional funding to complete development and commercialization of any future product candidates, or development and commercialization of other formulations or target indications of ensifentrine, if approved. If we are unable to raise capital when needed, or if a failure of any financial institution where we maintain our cash and cash equivalents prevents or delays us from accessing uninsured funds, we could be forced to delay, reduce or eliminate our product development programs or commercialization efforts.

We expect our expenses to increase in connection with our ongoing and planned activities, particularly as we conduct further clinical trials of ensifentrine, and develop ensifentrine in other formulations or for other indications. In addition, if we obtain regulatory approval for ensifentrine or any other product candidates, we expect to incur significant commercialization expenses related to activities including product positioning studies, product manufacturing, medical affairs, marketing, sales and distribution. Furthermore, we expect to incur ongoing costs associated with operating as a public company in the United States and maintaining a listing on the Nasdaq Global Market, or Nasdaq. Accordingly, we will need to obtain substantial additional funding in connection with our continuing operations. If we are unable to raise capital when needed or on attractive terms, we could be forced to delay, reduce or eliminate our research and development programs or any future commercialization efforts.

If we obtain regulatory approval for ensifentrine for the treatment of COPD in the US, we estimate that our existing cash resources, expected cash receipts from the UK tax credit program and funding expected to become available under the $150.0 million debt facility will enable the Company to fund planned operating expenses and capital expenditure requirements through at least the end of 2025 including the commercial launch of ensifentrine in the US. Future advances under the Oxford Term Loan are contingent upon achievement of certain clinical and regulatory milestones and other specified conditions. We have based this estimate on assumptions that may prove to be incorrect, and we could use our available capital resources sooner than we currently expect. In addition, our operating plan may change as a result of many factors unknown to us. These factors, among others, may necessitate that we seek additional capital sooner than currently planned. In addition, we may seek additional capital due to favorable market conditions or strategic considerations, even if we believe we have sufficient funds for our current or future operating plans. We maintain the majority of our cash and cash equivalents in accounts with major U.S. and multi-national financial institutions, and our deposits at these institutions exceed insured limits. Market conditions can impact the viability of these institutions. In the event of failure of any of the financial institutions where we maintain our cash and cash equivalents, there can be no assurance that we would be able to access uninsured funds in a timely manner or at all. Any inability to access or delay in accessing these funds could adversely affect our business and financial position.

Our future capital requirements will depend on many factors, including:

•the costs, timing and outcome of the regulatory submission and review of ensifentrine for the treatment of COPD in the US and other regions, including any post-marketing studies that could be required by regulatory authorities, if regulatory approval is received;

•the cost, progress and results of any other studies required to support the commercial positioning of ensifentrine for the treatment of COPD, if regulatory approval is received;

•the cost, progress and results of any clinical trials for the treatment of CF, asthma or other indications, or for other formulations of ensifentrine including fixed-dose combination products;

•the cost of manufacturing clinical and, if approved, commercial supplies of the ensifentrine active ingredient and derived formulated drug products;

•the scope, progress, results and costs of pre-clinical development, laboratory testing and clinical trials for ensifentrine in other indications and of the development of DPI and pMDI formulations of ensifentrine, or fixed-dose combination formulations of ensifentrine for the maintenance treatment of COPD and potentially asthma and other respiratory diseases;

•the costs, timing and outcome of potential future commercialization activities, including manufacturing, marketing, sales and distribution, for ensifentrine;

•the costs and timing of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending any intellectual property-related claims, including any claims by third parties that we are infringing upon their intellectual property rights;

•the timing and amount of revenue, if any, received from commercial sales of ensifentrine;

•the sales price and availability of adequate third-party coverage and reimbursement for ensifentrine;

•the effect of competing technological and market developments; and

•the extent to which we acquire or invest in businesses, products and technologies, including entering into licensing or collaboration arrangements for ensifentrine, although we currently have no commitments or agreements to complete any such transactions.

Any additional fundraising efforts may divert our management from their day-to-day activities, which may adversely affect our ability to develop and commercialize ensifentrine. In addition, we cannot guarantee that future financing will be available in sufficient amounts or on terms acceptable to us, if at all. Moreover, the terms of any financing may adversely affect our business, the holdings or the rights of our shareholders, or the value of our ordinary shares or ADSs.

If we are unable to obtain funding on a timely basis, we may be required to significantly curtail, delay or discontinue our research and development programs relating to ensifentrine or any commercialization efforts, be unable to expand our operations, or be unable to otherwise capitalize on our business opportunities, as desired, which could harm our business and potentially cause us to discontinue operations.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

2724

Item 6. Exhibits

Incorporated by Reference to Filings Indicated
Exhibit Number Exhibit Description Form File No. Exhibit No. Filing date Filed/Furnished Herewith
3.1
Articles of Association, as amended and as currently in effect
6-K 001-38067 1 12/30/2020
10.1†
Second Amendment to Loan and Security Agreement, dated as of March 2, 2022, by and among Silicon Valley Bank, Verona Pharma plc and Verona Pharma, Inc.
*
10.2
Amendment Agreement by and between Verona Pharma plc and Ligand UK Development Limited dated March 24, 2022
8-K 001-38067 10.1 3/30/2022
31.1
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
*
31.2
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
*
32.1
Section 1350 Certification of Chief Executive Officer
**
32.2
Section 1350 Certification of Chief Financial Officer
**
101.INS Inline XBRL Instance Document *
101.SCH Inline XBRL Taxonomy Extension Schema Document *
101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document *
101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document *
101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document *
101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document *
104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) *

Incorporated by Reference to Filings Indicated

Exhibit Number

Exhibit Description

Form

File No.

Exhibit No.

Filing date

Filed/Furnished Herewith

3.1

Articles of Association, as amended and as currently in effect

6-K

001-38067

12/30/2020

10.1

Second A mendment and R estated 2017 Incentive Award Plan

8-K

001-38067

10.1

05/01/2023

31.1

Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer

31.2

Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer

32.1

Section 1350 Certification of Chief Executive Officer

32.2

Section 1350 Certification of Chief Financial Officer

101.INS

Inline XBRL Instance Document

101.SCH

Inline XBRL Taxonomy Extension Schema Document

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase Document

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase Document

104

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

* Filed herewith.

** Furnished herewith.

† Portions of this exhibit (indicated by asterisks) have been omitted pursuant to Regulation S-K, Item 601(b)(10). Such omitted information is not material and the registrant customarily and actually treats such information as private or confidential. Additionally, schedules and attachments to this exhibit have been omitted pursuant to Regulation S-K, Items 601(a)(5).

2825

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	VERONA PHARMA PLC

Date: May ~~3, 2022~~9, 2023	By:	/s/ David Zaccardelli
		David Zaccardelli, Pharm. D.
		President and Chief Executive Officer

Date: May ~~3, 2022~~9, 2023	By:	/s/ Mark W. Hahn
		Mark W. Hahn
		Chief Financial Officer

2926


	2022
	Number of share options outstanding	Weighted average exercise price
Outstanding at January 1	12,695,200	$	1.38
Granted	608,000	0.62



Outstanding at March 31	13,303,200	$	1.34


	2022
	Number of RSUs outstanding	Weighted average remaining contractual term (years)
Outstanding at January 1	38,347,352	1.2
Granted	468,224

Vested	(3,943,144)
Outstanding at March 31	34,872,432	1.1